September 2020 Newsletter

SEPTEMBER 2020 CLIENT NEWSLETTER

ELECTIONS

With barely a fortnight left to the election, I would like to pray only for an honest election.  Everybody knows the opponents for the Presidency by now so let the true wishes of the real voters be known.  If it is connived, duplexed, or rigged then we will have a Constitutional crises which could result in bloodshed before it is decided.  Whatever you do, try to vote for the future of the country and flag, not short-term personal gain, and do your best to insure it is done honestly.

STIMULUS GRANTS, & LOANS

There have been government loans, grants, one-time stimulus payments extra unemployment benefits, and deferred payment mortgage plans like never before to offset the tragic effects of the pandemic and a shutdown economy.  The tax effects on these plans are all different.  On a deferred mortgage loan, the principal and accrued interest on missed payments are added back to the loan and will be repaid from the longer term which is not a taxable event.  Grants are not taxable because they are a return of taxes gifted by the federal government.  Loans for business performance and hiring are not taxable if the conditions are compiled with. One-time stimulus payments to most all taxpayers are grants and not taxable. There will be no audits except for sparse reviews of multi-million dollar loans and grants.

INVESTMENT PORTFOLIOS

When analyzing client’s portfolios I have noticed that many clients are invested in High Yield mutual funds.  Unknowingly or simply unadvised, the brokers should be telling them, especially senior citizens, that they have been investing in High-Risk Bond funds.  They usually pay very high dividends and earnings [interest and capital gains] but the risk is always there.  The risk equation is that higher risk equals the higher interest rates. There is a huge amount of foreign debt in some of them and foreign stocks or bonds in this case are not audited and vetted/certified as they are in America.  Sometimes sovereign foreign bonds, such as with Russia in the 1990s, were greatly discounted.  A $10,000 bond would be sold for $7,500 with the mutual fund buyer showing it at full value and receiving full interest payments.  Upon maturity the bonds would be cashed in and the investors would make a huge profit.  Problem was that the Russian bonds went south and became insolvent with the crash of the Empire during the 1990s.  One of my clients, who was retired, lost 1/3 of her portfolio from one day to the next. I never sold high Yield funds again.  They are also not recommended risk-wise for senior citizens unless they have a very large portfolio.

Also, Enron bonds were in play for some time until they took everybody out.  It was like a roller coaster with everybody climbing on board for a great ride uphill until the thing spun out of control to insolvency. Beware of risks which are in direct relation to gain or loss.

Noticeably are the high interest rates paid for California Municipal Bonds.  The average interest rate was 5% which would have an after tax equivalent of 8% compared to ordinary taxable interest bonds.   The broker had paid a premium to buy the bonds with the extra-high coupons.  Accordingly, a $10,000 bond with a higher than usual interest rate would command a sales premium depending on the life left on the bond.  The broker for this portfolio had paid premiums of thousands to buy many bonds.  Accordingly, the client would see he had received the 5% dividends but not notice the other line of the distribution that showed it was offset with amortized expense charges for the premium paid.

And then there were the high advisor fees cleverly hidden in the back of the statements. These range from 1.5% to 2% of the portfolio value and are charged quarterly. 

Lastly, one of the portfolios was heavy in energy stocks ranging from utilities to oil and gas.  These are falling out of favor with the California/New York initiatives to ban gas and oil in the future while forest fires are raising the utility rates like crazy.  Just because lack of maintenance by the utility company high-tension lines helped start fires in the Northwest this past year, they shouldn’t be responsible for all of the magnitude of unmaintained public forests which burned out of control.

Overall, the portfolios I saw had earned less than 2% year-to-date and the year is closing.  This year I expect to see 5% inflation and I expect many portfolios to actually lose principal due to inflation and poor earnings.  Next year could be a repeat.

CHINESE INTERNATIONAL INVESTMENTS

One other item written in the financial news recently is the invasion of foreign securities in our Stock Exchanges and other agencies.  Especially China with their long-term goals of world domination militarily and economically. First, our greedy International firms traded their technology transfers and trade secrets to do business in China. Woe to them to find themselves facing their products in international markets afterward with Chinese names on them.

Then comes the Chinese Belt and Road initiative to place huge segments of the world under China’s influence.   They loan infrastructure loans to Asian and African countries and build airfields and highways to them. They now enslave one to two million Uighur Muslims laborers in Xinjiang concentration camps. This is the Communist Chinese equivalent of the Russian Communist Gulag.

Their Capitalistic trend is to go public with many of their quasi-public entities.  I have read that up to 1/3 of Public retirement pension accounts are now invested in foreign accounts, mostly Chinese.  Many of them are merely shells of government subsidized companies formed to attract American dollars for trade and expansion. 

PUBLIC PENSIONS

Speaking of funding our state and municipal pension accounts; the Public pensions nationally earned only 3.2% this past year ending June 30, 2020. Low interest rates invite high risk in other hedge funds and securities. Most public pension accounts are greatly underfunded from paying higher benefits than earnings.  One fund in Chicago was only 23% funded and they had already sold off future sales tax receipts.  We should expect to see some Chapter 9 Municipal bankruptcies before the year is over.  Most cities have a municipally built and funded sports stadium which operates in the red every year.  More so this year though with the Coved virus keeping fans away.

INSURANCE ANNUITIES

On to the good news: We have access to hundreds of insurance annuities which have a large range of very low interest rates for the most conservative investor but have averaged around 6% in the indexed options.  No taxes on earnings are paid until withdrawn from the account.  EquiTrust offers a 6% up front bonus so if you worry about early withdrawal fees, then that would take care of them.  Long term investments are what annuities are all about and this is perfectly safe for pensions and IRAs.  There is also a no loss clause in case the insurance company takes a crash on investments because of uncontrollable economic situations, the owner of the insurance annuity does not suffer any loss against his/her principal investment balance.  He/she merely has no earnings for the bad year.  In our proposals of actual earnings, the 2008 year was the only year without earnings.  No fees are charged against your earnings or portfolio, ever.  This is the safest and best investment I know of, and I have seen them all from my 40 years in tax practice and 20 years as a securities broker-principal executive.

ELECTRICAL NOTES

Last but not least is the political trend to shut down normal energy sources such as fracking and transporting gas/oil by pipeline.  This ties in with the Green initiatives and mandates to close the 20 electricity generating peaker plants and all nuclear power plants in California which resulted in blackouts and brownouts this past year for the first time since the Enron fiasco. They have resumed buying power from out of state, just like when Enron was involved. The State Government recently announced the mandate for only all new electric vehicle sales from 2035 [autos] to 2045 [trucks].  The substitute for gas/oil fuels will be electricity.  Electric power from where? The latest proposed solution was to use the electric car [batteries] as a reverse plug-in mode to feed power BACK into the grid during peak periods.  I can see it now, “Honey, don’t go shopping after dinner because the State is draining our Tesla batteries. But we can recharge them after midnight tonight from the windmills.” During the power cutoff this summer, Governor Newsome of California told us the solution was to use less electricity. Reminds me of the Express Train from Nowhere to Nowhere.

Best wishes for a less stressful remainder of the year.  Call or notify us if you should receive any IRS or California notices or communication on your taxes.  We are also available for free investment portfolio reviews and estate planning.

Phil Chute, EA, Nett, Leslie, and Sarah in the publishing background